Bankruptcy due to medical bills and student loan payments

Before Stacy Jorgensen became ill with pancreatic cancer she took out $43,000 in student loans. She was forced to file for bankruptcy as her student loan payments piled up alongside her medical bills, as well as submit legal proof of “undue hardship.”

Educational Credit Management Corporation, the agency charged with monitoring bankruptcy declarations such as Jorgensen’s, is a nonprofit with an exclusive government agreement. The agency argued Ms. Jorgensen did not qualify and would have to pay in full, dismissing her concerns about the cancer’s return.

“The mere possibility of recurrence is not enough,” said a lawyer representing the agency. “Survival rates for younger patients tend to be higher,” another wrote, citing a study that had been presented in court.

There is $1 trillion in federal student debt today, a fact that poses an acute risk to the economy’s recovery due to the possibility of default on those taxpayer-backed loans.

Congress made it hard for students to file bankruptcy on student loans

Because Congress has made it especially hard for borrowers to get bankruptcy relief for student loans only a few hundred try every year. While there has been attention given to aggressive student debt collectors hired by the federal government, the organization pursuing Ms. Jorgensen brings legal challenges to those few who are desperate enough to seek bankruptcy relief.

Since Educational Credit Management Corporation’s founding in 1994, it has been the main private entity hired by the Department of Education to fight student debtors who file for bankruptcy on federal loans.

A review of hundreds of pages of court documents in addition to interviews with consumer advocates, experts, and bankruptcy lawyers suggest that Educational Credit’s pursuit of student borrowers has become increasingly ruthless and that it has stepped over a line between legitimate efforts to collect on defaulted loans and legal harassment.

In 2012 a panel of bankruptcy appeal judges denounced what it called Educational Credit’s “waste of judicial resources,” and said that the agency’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”

Representative Steve Cohen, has introduced a bill to limit such predatory tactics, saying, “The government should hold its agents to the highest standards, and I don’t know that we’ve been doing that.” He added that the government has a special responsibility to use “a standard that’s reasonable.”

“We thought we were doing God’s work,” said David A. Longanecker, a former Department of Education official. “We didn’t realize the full extent to which our actions would lead to some activities that would be unfair to borrowers.”